Interesting reading from 'The Australian' Newspaper... ******************************* Golden chance awaits miners By James Dunn The Australian December 30, 2000 I have just finished reading Peter L. Bernstein's "The Power of Gold," subtitled "The History of an Obsession" (John Wiley & Sons, $39.90, hardback) and it got me thinking about the gold market. If, like me, you love a well-written economic history book, Bernstein's aptly titled (and subtitled) book will make a perfect use for that book voucher you got for Christmas. Bernstein's major theme is that the gold market has never been -- and can never be -- a simple commodity market, because of all of the emotional capital we humans have invested in the yellow metal. After the excesses of the pillage of the new world by the old, this reached its zenith in the days of the gold standard, when the world's currencies were simply names for certain defined weights in gold. We have largely demonetized gold, in that it no longer backs our currencies. When the European Central Bank was formed to oversee the euro, only 15 percent of the reserves to back that currency were in the form of gold. Gold is still money, just not officially. Looking around the gold market these days, you would have to say that it is still far from simple: it is just that the complications are new. The gold market is artificial. The physical market -- the annual trade in gold mined -- is utterly dwarfed by the market in derivatives, gold futures, and options contracts. U.S. gold analyst Paul van Eeden calculates that about 260,000 tonnes of gold is turned over in total each year on the London Bullion Market -- nearly twice the amount that has ever been mined. Only about 5000 tonnes of physical gold, says van Eeden, is traded each year. That is less than 2 percent of London turnover. The notorious central bank sales -- which garner all the headlines about depressing the gold price -- make up less than 0.12 percent of the gold market. Miners and consumers of gold are bit players. The derivatives market controls the gold price. Gold is not a supply/demand-driven market, it is an exchange rate-driven market, because the price is determined by the value of the U.S. dollar. The U.S. dollar has usurped from gold the role of asset of last resort. If the U.S. dollar were to fall, the gold price as expressed in U.S. dollars would improve. That would suit the Australian miners, whose gold price -- expressed in Australian dollars -- is actually very healthy. At the currency's record low of 51.1 U.S. cents in October, the Australian dollar gold price hit a record high $A526 an ounce, a rise of almost 40 percent in a year. It is now at about A$496 an ounce. If an Australian miner is not able to achieve excellent margins at these prices, it should not be in business. The buildup in the gold derivatives market has created a huge overhang in the gold market. Nobody really knows how large it is, but two quixotic court cases aim to try. The first suit is dynamite stuff. It is being brought by one Reg Howe on behalf of the Gold Anti-Trust Action Committee (GATA), which has accused some of the financial world's most powerful individuals and organisations of masterminding a global conspiracy to keep down the price of gold. First defendant is Alan Greenspan, chairman of the Federal Reserve Board of the United States. Joining Greenspan as defendants are soon-to-be-former U.S. Secretary of the Treasury Lawrence Summers; William McDonough, president of the Federal Reserve Board of New York; and the firms of Chase Manhattan, J.P. Morgan, Deutsche Bank, Citibank, and Goldman Sachs, among others. The suit alleges that, because the highly geared mountain of gold derivatives is mainly a bet on the gold price falling, all the named parties have colluded to keep it from rising, so as to protect the global financial system from the consequences of the unravelling of the derivatives positions. The second is a class action filed in a U.S. court by aggrieved shareholders of London-based Ashanti Goldfields, which almost fell into bankruptcy in 1999, when the value of its hedge book plummeted. It seemed that Ashanti had been too clever in trying to lock in forward prices for the gold it was mining in Ghana. Now Ashanti shareholders are demanding unspecified damages for alleged "reckless financial speculation." The shareholders are alleging that when they thought they were shareholders in a gold mining company, Ashanti was actually gambling with exotic financial instruments, the success of which required the price of gold to fall indefinitely. Ashanti chief executive officer Sam Jonah and ex-chief financial officer Mark Keatley are also named personally as defendants. Tilting at windmills? Maybe. Quite possibly, by the end of the cases, investors will know more about the real gold price, and the intricacies of hedging activity, than ever before. At least the prospect of a decline in the U.S. dollar, more real for investors, is in the offing for gold shares, which should make the Australian branch of the industry appear good value indeed on a global scale. **************************** Kind regards, Michael Moore [EMAIL PROTECTED] http://www.gold-today.com Sign up with e-gold today and get grams of e-gold here. https://www.e-gold.com/newacct/newaccount.asp?cid=129542 http://www.visarebates.com/Index.cfm?ReferralID=goldtoday subscribe to the gold-today group at http://www.egroups.com/messages/goldtoday --- You are currently subscribed to e-gold-list as: [email protected] To unsubscribe send a blank email to [EMAIL PROTECTED]
